This document will cover the following:
- The concept of joint ventures (JV's) and mergers and acquisitions (M&A's).
- Why companies merge and acquire.
- The underlying merger rationales and drivers.
- Different types of mergers.
-Why mergers can fail.
BUSINESS EXPANSION
You may remember in previous lecture and seminar that businesses make a profit and
use this to expand the business. Today we look at the general idea of business
expansion. What do businesses do when they have more income?
• Concept of joint ventures and mergers and acquisitions (JVs and M&As)
• Why companies merge and acquire
• The underlying merger rationales and drivers -why do they want to do JV and M&A?
• Different types of mergers
• Why mergers can fail
Mergers
Common in business. Often in news. BA and Iberian Airlines looked at a merger. Heinz
also. German banks - 260billion giant.
Example: merger of Currys and PC World. Used to be two independent companies in
the same market. One less competitor in the market
The connection between business and economics - “Theory of the firm”.
Economic reasons why businesses want to be involved in JV and MA.
Why do companies merge?
Airlines, food companies… what are the reasons to merge from a business point of
view?
The main idea behind any expansion is 2+2=5. Looking at the idea of synergy. Key
principle behind buying any company is shareholder value. Over and above the sum of
the two companies. Increase that to something higher. This is what drives idea of
expansion.
• The principle of synergy = 2+2=5
• It’s also about growth.
• It’s also about intangible assets (human capital, customer and structural capital.
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, PC World and Currys: they create greater growth when coming together. Also increase
their market share and intangible assets.
External growth
Fastest way to grow is external growth = JV, M&A
• JV = is not the most common, seen more in 1960s and 1970s. It’s when two or more
companies pool resources because they want to accomplish a specific task i.e. a
partnership. E.g. when they want to enter foreign market. Can even involve a third
company. Come together on an equal level.
• Merger = joining together two or more companies to become one company.
• Acquisition/takeover = one company buys the other company.
Sometimes JV happens before Merger and Acquisition.
Example: Former eastern bloc used to have own car companies in each
countries. I.e. East Germany even had two, also Poland. Romanian car company
Dacia. At the end of cold war, Eastern European companies opened up. Unable
to compete with Western counterparts such as Mercedes, VW etc. So most went
under. Exceptions = Skoda (Prague) went in JV with VW. Progressed to full M&A.
Skoda still exists but in reality they are managed by VW.
Spain: Seat - became part of VW. Not as successful.
Romania: Dacia - became part of Renault. Not as successful as Skoda/VW. We
will look at this later.
You can have JV that progresses to M&A or an outright M&A. This is the main way
businesses expand - external growth.
• Merger = mutual consolidation of two or more entities. They remain equal.
Integrate operations into single entity with shared control
• Acquisition = purchase of business by another enterprise. This does not need
mutual decision. Can be aggressive take over.
However VW and Skoda - still have a board of managers with two from VW and
one is actually from Skoda. Production still in Czech Republic - skilled staff,
lower cost, maximise profits.
Other example of merger: Renault and Dacia. Not as successful. Most managers
from Renault. Problems with productivity in Romania. Renault chose the wrong
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